September 25, 2017
September 25, 2017
One of the big expenses that come with a mortgage is private mortgage insurance (PMI). If you don’t have a down payment of at least 20% of your purchase price, you are expected to pay an insurance premium until you’ve paid down your balance to the point where you owe less than 80% of your home’s value.
It is possible to avoid PMI, though, with a little creative financing. One way is through what is called a piggyback loan.
First, it helps to understand why you might have to pay PMI. Many lenders require a down payment because they like you to have “skin in the game.” Conventional wisdom says that you if you put in at least 20% of the purchase price, you are more likely to fulfill the loan terms.
When you have that amount of money, your financial situation is considered more stable. Plus, it’s thought you won’t risk losing all your “investment” by walking away.
Remember: the lender is actually putting up the money for your home. If you default, the lender stands to lose out. PMI is a way for the lender to be protected. If you default, the insurance helps reimburse the lender. But, since you are the risky party, the lender expects you to pay the premiums on the insurance.
Getting around it requires finding a lender willing to let you use a piggyback loan as part of the down payment process.
Your piggyback loan is basically a home equity loan for the portion of your down payment you are missing. One of the most popular types of piggyback loans is the 80-10-10. With this type of piggyback mortgage, you end up getting a loan for 10% of the purchase price and using a down payment for the remaining 10%.
You avoid the PMI because you are only getting your “main” mortgage for 80% of the purchase price. It’s like putting 20% down.
There are other configurations you can use as well, depending on how much you have for a down payment. It’s also possible to get an 80-15-5 mortgage, which means that you get your piggyback loan for 15% of the purchase price and make a 5% down payment.
There are some lenders that will allow an 80-20 arrangement, meaning you use the piggyback loan to make your entire 20% down payment. However, since the financial crisis, you are less likely to find a lender willing to use an 80-20 piggyback loan.
Even though it seems like a good way to avoid PMI, it’s important to understand that piggyback loan isn’t always the best option for everyone. Here are a few things to keep in mind before you go for the piggyback loan:
For some homebuyers, a piggyback loan can be a good solution to paying PMI. However, it’s important to run the numbers and make sure that it really will save you money in the long run, and make it possible for you to get the best outcome for your buying experience.
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